Device exporters fear price controls in China as social tensions drive change

Efforts to rein in a 'corrupt' distribution system could limit technology availability.

WASHINGTON — With China's demand for imported medical devices set to rise 12% to 15% by 2010, including orthopedic devices, foreign manufacturers are expecting strong growth there. Yet China's unusual distribution system, marred by extensive corruption, could soon spark a government crackdown that blunts that promising outlook.

That was the message from speakers here at the Globalization of Medical Device Policies international conference, held by AdvaMed, an industry trade group.

When it comes to China and planned health care reform, the best word is "murky," said Henry Levine, senior vice president for Stonebridge International, a global business consultancy.

China has undergone wrenching changes in its health care system, Levine explained. Where most Chinese had some level of government-paid health care in the 1980s, today 80% to 90% of the rural population and less than half of the urban population has no health insurance. That is creating high social tensions and pressure for government action, he said.

Today, Chinese doctors and hospitals earn most of their income from the sale of medicines and medical devices, which patients must pay for before treatment, Levine said. This has led to over-prescribing and corruption among middlemen who inflate device prices, knowing the added costs will get passed on to patients.

Physicians and hospitals are also supposed to limit their own markups to 5%. However, through various kickback schemes, they charge closer to 8% to 10%, in part out of necessity due to such poor government funding, said Paul Barry, Boston Scientific's director for international health policy.

At present, only 5% to 8% of hospital operating funds are provided by the government. Both hospitals and physicians use distributor "rebates" to earn operating revenue, Barry said.

"As a result, device demand is growing, soaring, because it represents a source of funding, and this has raised some concerns that device consumption has gotten out of hand because of those incentives," he said.

The situation is creating a lot of turmoil in China, the fastest growing medical device market in the world and the second-largest market in Asia after Japan, said Roberta Lipson, chief executive officer at Chindex International, another consulting company. "It's not industry's fault, but the government is looking to break up this corruption."

To offset it, officials may expand so-called tendering or price negotiating programs found in some provinces — in effect, a negotiated price setting. The problem, said Barry: The authorities are basing their idea of a fair price on numbers that do not include all costs and expenses. That could limit the availability of medical technology, reduce innovation and raise prices in the long run, he said.

For more information:
Barry P. China's developing system for medical device reimbursement.
Levine H. Challenges and opportunities for U.S. firms in China's healthcare sector.
Lipson R. Doing business in China: A view from the medical equipment sector. All presented at the AdvaMed 2006 International Conference, Globalization of Medical Device Policies - the Good, the Bad and the Ugly. Oct. 30-31, 2006. Washington.
AdvaMed is also known as the Advanced Medical Technology Association; www.advamed.org.